How a Millennial Can Retire a Multi-Millionaire

A million dollars is a lot of money. Most of us in our 20s will not see a seven figure net worth for a long time, if at all. Honestly, though, a million dollars is completely attainable for every single person. It’s a lot more realistic than most people think.

Unfortunately, a million dollars really isn’t a ton of money. There’s a pretty common rule, referred to as “the 4% rule” that states that you should not withdraw more than 4% of your wealth in one year in retirement. This rule is based on a scientific study done several decades ago that shows if you can limit your withdrawals to this amount, you’ll never outlive your money.

This study was based on historical data, so don’t take it as a hard fact. Nobody knows how the markets will change over the next few years, let alone the next 40. But, for lack of a better rule, we’re going to stick to 4%.

If you haven’t done the math yet, 4% of $1 million is $40,000 per year. That’s before taxes, if you owe any (some investments are taxed differently). Realistically, you’ll probably be left a few thousand short of $40k per year. Plus, that $40,000 likely won’t go as far as it does today because of inflation. For example, $1 million in 1976 would be worth over $4.2 million in 2016.

My point is that $1 million dollars may seem like a lot of money, but if you want that money to last, your retirement will not be glamorous. So really, becoming a millionaire is a decent starting point, but it’s probably smart to find a higher goal.

If A Million Isn’t Enough, What Is?

Let’s assume you’re a 25 year old millennial. If you’re not, that’s okay, you’ll just need to adjust the numbers accordingly. For simplicity, you’re planning on retiring 40 years from now at age 65.

The first thing we need to think about when figuring this number out is inflation. It’s pointless to shoot for a number that will only be worth a fraction of what you’re expecting it to be. The first dollar your Mom earned in 1976 that’s framed and hanging in her office is now worth less than 1/4th of what it was when she earned it. That dollar could’ve bought her an 18oz jar of Skippy peanut butter in 1976 and left her 21 cents to spare. Now the same jar of peanut butter costs almost $3.

Obviously this is a small example, but think about big ticket items, like a car or house. Or plane tickets to travel the world. Or your kids’/grandkids’ college tuitions. If you want to comfortably afford these things, you’ll need to plan ahead for it.

For the past few years, the U.S. inflation rate has fluctuated between 0% and 3%, but it has usually been on the lower end. So, let’s use a 2% average rate going forward to be conservative. To figure out what a dollar will be worth in 40 years, we’re going to use some math that you’ve already seen on my post, The Beauty of Compound Growth.

Yeah, compounding baby! Except compounding inflation, boo!

If you don’t want to worry about doing the following math yourself, here’s an Excel file I made to help you out: Retirement Need Calculator

Here’s the equation, simply fill in the variables to fit your situation:

Dollars x ( 1 + rate of inflation as a decimal ) ^ Years

So, for our example of $1 million at a rate of 2% inflation, the equation would look like this:

$1 million x ( 1 + 0.02 ) ^ 40 = $2,208,039.66

This means that $1 million dollars in 2016 will be the same as $2,208,039.66 in 2056 at your retirement. If you’ve only saved enough to get to $1 million, you’re going to have half as much buying power as you expected. A $1,000 plane ticket today would cost $2,208 in 40 years. A $100,000 house would be $220,804. Can you see where I’m going with this?

Your money will be worth less than today. Prepare for it.

With that in mind, the second major component of finding your magic number is recognizing how much you’ll need to live comfortably. Obviously, that’s a little tricky to do for a millennial that’s 30-40 years away from retirement, but give it your best guess. Can you live happily off of $40,000 per year? $75,000? $100,000?

Think about what you plan to do in retirement. If your goal is to travel the world until you die, you may need to adjust your number higher. Taking six international vacations a year would eat up $40,000 pretty quickly. If your goal is to live a peaceful life in a rural community, $40,000 might be plenty. For me, I’d like to become a college student again when I retire, and just continuously pursue various degrees. Tuition is going to drive my number up.

Once you have a general idea of what you may need, we can do the same math that we used on our $1 million earlier. We’ll use $40,000 again.

$40,000 x ( 1 + 0.02 ) ^ 40 = $88,321.59

Once we know the number you’ll need 40 years from now, we can work backwards to find the total amount you’ll need to draw from. This math is much easier! You literally just multiple your number by 25. Our example would look like this:

$88,321.59 x 25 = $2,208,039

Does that look familiar? It should. That was what we found when did the inflation example. In essence, if you want the lifestyle that accompanies $40,000 in income today, you’ll need to retire with a bit over $2.2 million.

I’m not trying to scare you off with these somewhat huge numbers, but I do hope that it’s a bit of a reality check for those who haven’t thought about it much yet. Trust me, it’s 100% attainable for each and every one of us.

Crap, How Do I Get That Much Money?

Most of us won’t make that kind of money overnight, but all of us can make that over the next 40 years. It’s only a couple million, no big deal!

Really, though. It’s not a big deal. Even if you’re earning a below average income, you should be able to manage. Using this calculator from The Calculator Site (not a joke), we can work backwards from our desired goal and see how much we’ll need to put away each month.

The calculator should be pretty straightforward. Simply plug your savings goal and your current savings in, choose an annual interest rate (10% is a realistic number since we’re including inflation), and then input the number of years until you retire.

Submit, and ta-da! Out pops the amount you’ll need to put towards retirement each month.

Looking at our example from earlier, the calculator tells us that we’ll need to put $349 away each month. Obviously, $349 is a pretty good chunk of our monthly pay for most of us, especially when we’re first starting out.

If you can’t swing that now, it’s not the end of the world. You can make up for it later, but it will cost you more to get to the same amount because you’re missing out on the growth. Check out this FFP article to see why it’s a wise choice to try and hit that goal sooner rather than later.

The higher your goal, the more you’ll need to save. It’s as simple as that.

Conclusion

Shooting for $1 million may not be enough if your retirement is 40 years away thanks to inflation. Heck, depending on your plans, $3 million might fall short. Regardless of the numbers, figuring this stuff out early should help to provide you a goal.

Finding a way to save around $350 per month might be tricky on a lower income, but the more you can save early on, the better off you’ll be in the long run. Plus, the more you can save, the less time you’ll have to work until retirement.

Wouldn’t it be nice to have the ability to retire at 55 instead of 65? Sure doesn’t sound too bad to me.

At the very least, it would be wise to find the bare minimum you’ll need. How crappy would it be to turn 65 and realize you’re nowhere near what you need to retire? Do you want to work a few more years? Could you afford to cut your expenses and have little to no fun money? There are already too many seniors living on Social Security alone that are struggling to get by.

Six vacations a year? Forget it. Paying for their grandchild’s college? Nope. Most of their money goes to housing and other bills. Probably not the lifestyle we all want retirement to be.

In summary, figure out what you could comfortably live off of, calculate how much you’ll need to save each month to get there, and then make it work. Cut your expenses, find ways to boost your income, and save as much as you can.

It’s a lot tougher to make some extra cash when you’re 80. Start now so you don’t have to worry about it.

What are your retirement goals? How much will you need to accomplish them, and how much will you need to save in order to get there? Comment below and share!

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10 comments

I like this article. I wonder if there is a way to calculate saving stringently at a high paying career for ~10 years and then switching to half time and saving less but also being semi retired (consulting, blogging, etc…)

Thanks DDave! I thought about trying to build something that could be customized based on things like that, but it’s a little bit easier said than done. Some miracles can be performed in Excel, just need to miraculously get the time to plow into something like that.

Nice post! The current interest rate on 10 year bonds and the yield on the S&P 500 are near or below the current rate of inflation. Likewise most projections for stock price growth for the next 10 or so years is also low (5% or less). So, it does indeed seem hard if not impossible right now to get enough dollars set aside to have a reasonable nest egg for early retirement. I think both the young and old are struggling with this now. Nice to see someone reminding folks of the basic math in this regard.

Thanks Karl! Those are some pretty fair points. If our economic growth continues on the trend it’s been on for the past few years, it will definitely be hard to get some strong returns. I have a feeling that it’ll be shaken up a bit here pretty soon (not sure if it will be in a good or bad way), so we’ll have to see what happens. Fair points though, I’ll admit I was somewhat optimistic with the numbers here, but like you said, understanding the basic math is key. Most people don’t work with this type of thing on a regular basis. Thanks for the comment!

You make some good points here. Its very true that starting in your 20’s can do wonders for your accounts. Just get your accounts established and contribute what you can to your 401k or IRA (or both). As time goes on you wont even miss that money. Set it up for automatic contributions. Now in my 40’s, my accounts are pretty huge and I’ve never made more than a lower middle class wage. And even though I’ve studied finance for a long time, I never really put much time or effort into trying to manipulate my accounts. Mostly just set it up on automatic and let it run for over 20 years. And over the last few years Ive fine tuned my spending and cut out a lot of the wasteful things I was blowing money on. I still have most things I want, but as you get older and wiser you realize you dont need so much stuff, constant upgrades etc to be happy.

Thanks, Arrgo! You’re absolute right. Even a small chunk of your income can explode over the long term. Automated, boring investing is the best kind of investing. The more exciting it is, the higher your chances are that you’re doing something wrong. We also forget that having more money doesn’t mean you’re required to spend more. If you’ve got all you need, why buy more? Thanks for sharing!

This is a great post. So much of our success depends on future market returns and starting to save in a down market has always been shown to have a huge impact on later returns. Unfortunately for new graduates the market is at an all time high and while it will continue to go up probably over the next 30 years, there is definitely doing to be a correction sometime soon. Data shows that new investors who get in when the market is low have massively larger returns. Time will tell.

Thanks, MM! Exactly right, the best time to buy is when there’s blood in the streets. It’s just hard to decide what to do in the short term… Do you buy now and hope for the best, or risk missing out on some gains by waiting until the market cracks? There’s always a trade-off. Thanks for the comment!